Wednesday, March 13, 2019, Delray Beach, Florida


From My Work-in-Progress Basket

Lessons From What I Learned Losing a Million Dollars

No Comments

Part 2: Misunderstanding “Investing”

As a student of literature in college, I came into my adulthood knowing little to nothing about investing. That did not deter me from making money, but it did diminish my ability to convert that growing income into wealth.

As my income went up, so too did my spending. And of the spending I did, the most foolish were my “investments.”

I put quotes around that word to highlight a point: My ignorance of investing was profound. In fact, I could not even define the term. I might have attempted by saying something about putting money into stocks and bonds, but that sort of vagueness is not helpful. In fact, it is one reason most “investors” fail to grow their wealth faster than inflation.

When you think of investing as something as nebulous as putting money into stocks and bonds  (or commodities or futures or real estate or gold mines), you lose the opportunity to examine the difference between different modalities of “investing” – such as trading, speculating, betting, and gambling.

And when you don’t make these distinctions, you can justify foolish behavior by giving it a name it doesn’t merit: i.e., investing.

Wealth Building vs. Investing

Let’s start with this. There is a difference between accumulating wealth and investing.

Accumulating wealth is a good and sensible objective. But investing? It’s an activity – something you do with your money – to achieve the goal of accumulating wealth. Whether it can achieve that purpose depends heavily on what you are actually doing, which depends on your definition of investing.

Examples: my art collection, my botanical garden, my vintage cars, etc.

If you ask me to part with these treasured things, I will refuse. If you point out that they are “just sitting there,” costing me money (insurance/storage/maintenance), I will point out that their values have appreciated over the years and will likely continue to do so. In other words, they are investments.

I’ve been aware of the falseness of this posturing for many years. And I’ve written about it many times, pointing out that the problem with the word “investing” as generally used (especially by the financial industry) is that it puts a sort of seal of approval on a wide range of financial activities – from the cautious to the prudent to the speculative to the downright reckless.

So how do we distinguish?   READ MORE

Continue Reading

Monday, March 11, 2019, Delray Beach, Florida


From My Work-in-Progress Basket

Lessons From What I Learned Losing a Million Dollars

No Comments

Part 1: The One Secret That All Successful Money Makers Know and Use

It was the only one left in my audiobook library. I didn’t remember buying it. I’d never heard of it or its authors (Jim Paul and Brendan Moynihan). And the title wasn’t a turn on: What I Learned Losing a Million Dollars.

I mean, really. There are probably millions of businesspeople and investors that could make such a claim. You lost a mere million? Don’t bore me. I want to hear from someone that’s lost a hundred million!

But it was, as I said, the only audiobook in my library. So I began listening to it… and was drawn in.

The first third was a breezy memoir of Jim Paul’s early life, education, and how he rather accidentally became a commodities trader, earning big bucks and living large. Then there was the downfall – a pretty exciting account of going broke and into debt fast.

I almost shut it off there, thinking I’d heard the best part, but I’m glad I didn’t. What followed was an analysis of not just Paul’s pride-bound bad thinking but of the mistakes all investors make sometimes (and some investors make all the time), as well as other insights that rang true.

Paul’s account of his experience is, in part, the story of a smart person that cared more about being right than making money. It is also a portrait of the mortal sins of wealth building: arrogance, ignorance, and greed.

In reviewing the mistakes that led to his million-dollar loss, Paul first examines his trading strategy. Was the strategy wrong? Should he have been using another one?

Then he takes you through a quick review of the strategies of some of the most successful investors of modern times. He demonstrates that each of those strategies was different, and all of them had rules that forbade practices that were followed in the others.

The rules that worked for George Soros, for example, are very different than the rules that worked for Warren Buffett. John Templeton’s strategy worked well for him, but would have not worked for Peter Lynch, and vice versa.

Paul concludes, convincingly, that there is no such thing as a successful trading strategy, and that the search for a winning strategy is a waste of time and money. Instead, he argues that if there is a secret behind the fortunes of Buffett and Soros and the like, it must be something they all did. And when he looked for it, he found it.

The single protocol followed by all of them, regardless of their profit strategies – was about limiting losses.

Paul doesn’t argue that any profit strategy can work. His point is that any profit strategy that isn’t coupled with a loss-prevention strategy is doomed to fail.

I thought about this. And it is true of my experience. Nearly every time I put money into an enterprise without some sort of stop-loss mechanism, I ended up losing most or all of it. And if I look at how I acquired and built wealth over the last 40 years, the strategies that worked all had serious downside protection.

When I consider an investment these days, I spend no more than a moment thinking about the upside potential. I’ve been doing business and investing long enough to know that dwelling on how much money you can make reduces your investment intelligence by about 98%. So when someone pitches an idea to me, I focus my thinking almost entirely on how I can limit my losses if things don’t work out.

There are three ways that I limit my losses:

  1. I use stoplosses– actual stop losses for stocks or equivalencies for other assets – to close out my position at a predetermined point if the investment goes south and hits my “get-out-now” number.
  2. I use positionsizing to determine how much I will invest in any given project. This is very powerful, perhaps the most powerful technique for safeguarding and developing wealth. I have a predetermined dollar figure that I will invest in businesses about which I know little, and another for investments about which I know a lot. When you have a modest net worth, that figure might be 5% of it. As your wealth grows, you reduce the percentage. These days, I never invest more than 1% of my net worth in any single investment or business deal.
  3. I diversify. My investment portfolio consists of real estate (mostly income-producing but some land banking), “Legacy” stocks (large, well-capitalized, dividend-bearing stocks), super-secure bonds (if the yields are decent), private lending (for secured assets), business ventures, options (selling puts on Legacy stocks), and cash.
Continue Reading

Thursday, January 24, 2019, Delray Beach, Florida


From My Work-in-Progress Basket

A Letter From a Man Whose Mother Is a Bank

No Comments

I received a letter this morning that began as follows:

Dear Mark – I hope all is well with you and yours. I want to reach out to you because you can help me…

I looked at the signature. A name I didn’t recognize. Perhaps I had forgotten. I asked Gio to look him up in our files. She couldn’t find him.

Notice his rationale for “reaching out to me.” It was because I could help him.

I was intrigued. Either I did know the man and he was making a claim on that relationship, or we had no relationship and he was oblivious to how arrogant his request was.

His letter continued:

I am living at home in a toxic environment trying to launch my internet business. I haven’t worked for months; jobs are hard to land these days. I do not want any handouts, I just want the opportunity to explain my circumstances.

He went on to tell me all about his life… his dreams and his challenges. He explained that his current financial problems were “not his fault” but the fault of his “dysfunctional family.”

And then, in the very next sentence, he mentioned that he had been using his supposedly dysfunctional mother “as a bank for almost nine years.”

I was now reading with the utmost interest.

“My livelihood is on the line,” he said. He had “boxed himself” into a fast-disintegrating financial corner, but he was not going to give up. Where there is hope, he believed, there is hope!

And what was that hope? Words of advice from me? Perhaps a free copy of Automatic Wealth? Or Seven Years to Seven Figures? Or Living Rich?

No.

“To be totally transparent with you,” he said, “Money will take care of the aforementioned problems.”

Aha! So it was as easy as that. All he needed was some quantity of my money. All I had to do was sign a check and send it off… and presto! He would be in fine shape.

Every week, I get letters from people asking for advice. And I answer every one of them. Sometimes with a quick suggestion but usually by suggesting that they read one of my books. But it’s rare that I get a request like this.

I believe that no one has an inherent right to wealth. I believe that we are born into a universe that guarantees us nothing. But I also believe that the acquisition of wealth – enough to sustain oneself – is a fundamental human responsibility.

It requires three things:
READ MORE

Continue Reading

Thursday, January 10, 2019, Delray Beach, Florida


From My Work-in-Progress Basket

10 “Truths” About  Building Wealth That You Won’t Hear from Your Financial Advisor

No Comments

When I “decided” to get rich, I didn’t know the first thing about creating wealth.

I was an editor. I wanted to be a novelist. I’d never taken a course in finance or economics. Plus, I was broke.

But I had a great advantage. I was working for a human wealth machine – a man who, at 43, had already created three hugely profitable businesses. He adopted me as a surrogate nephew and taught me everything he knew about making money. Eventually, he made me his partner.

I retired about 7 years later with a net worth well in excess of $10 million.

Eighteen months later, I gave up on retirement and went to work as a “growth” consultant for a publisher I much admired. By combining the marketing know-how I’d learned from my previous partner with this man’s ideas and generosity of intellect, I was able, about 10 years later, to retire again, my wealth having multiplied many times over.

In this, my second retirement, I focused on two long-put-aside lifetime goals: to write and to teach. I was able to do both at the same time by starting a blog called Early to Rise. In the ensuing 10 or 11 years, I wrote and published more than a dozen books and thousands of essays, “teaching” my readers what I knew about entrepreneurship, marketing, business management, and wealth building.

And even though it was no longer a priority, my net worth continued to grow.

At 60, I meant to retire again. But I got talked into going to work for someone who worked for someone who worked for me. (Don’t ask.) As co-founder of Palm Beach Research Group, I still write about wealth building. But I’m older now and have more experience.

I’d like to think that my observations and advice are somehow better now. At the very least, I’ve been able to go wider and deeper in terms of thinking about wealth, how it’s created, how it’s invested, and how it’s lost.

Why am I telling you all this?

Maybe because I’d like you to think that when it comes to the subject of building wealth, I have some insights that might be useful to you.

For example, I’ve come to believe that many commonly accepted “facts” about wealth building are, in fact, fallacies.

Take these examples:      READ MORE

Continue Reading

From My Work-in-Progress Basket

Principles of Wealth #22*

No Comments

Tuesday, November 13, 2018

The efficient market hypothesis is bogus. The stock market, its sectors, and its individual stocks are often mispriced. But that doesn’t mean speculating on those errors makes sense.

Speculation is at best an intellectual form of gambling, like playing blackjack rather than roulette or craps. But all forms of speculation are likely to decrease one’s wealth over time. And every experienced speculator, in his heart, knows this to be true.

Selling speculations is not speculating. It is a form of business. And for some, it is a very profitable business.

 The prudent wealth builder that speculates treats his speculations as spending.

Delray Beach, FL.- In an essay published in Investopedia, Tim Parker writes: “Whether speculation has a place in the portfolios of investors is the subject of much debate. Proponents of the efficient market hypothesis believe the market is always fairly priced, making speculation an unreliable and unwise road to profits. Speculators believe that the market overreacts to a host of variables. These variables present an opportunity for capital growth.”

The argument Parker attributes to speculators is correct. The stock market is often inappropriately priced. And sectors within the stock market are badly priced even more often. Not infrequently, market sectors are grossly mispriced. The same is true for individual stocks.

I am always astounded when I think of how quickly and widely accepted the thesis of the efficient marketplace came to be. The logic, simply put, is that the big financial players – including institutional investors, hedge funds, and the like – have, through internet communications and computer technology, access to all of the key financial data they need to value stocks. They even have access to indices of public sentiment. With all that knowledge available and updated in nanoseconds, the price of any stock, any sector, and even the market itself will of necessity reflect the correct pricing.

This doesn’t make sense on several levels. For one thing, it is impossible to measure consumer sentiment or to predict its ebb and flow. More importantly, raw data (such as history of earnings, revenue growth, P/E ratios, etc.) cannot possibly give a reliable view as to the value of a company in the future.

I cannot tell you with any accuracy the true value of the equity of any of the companies I own and control. And I certainly could not predict what the value will be in six months or a year. So how could these data-crunching investment behemoths know?

But forget about the logic. Take a look at any 20-year period of stock market valuations and you will find moments when the market “corrected” itself, sometimes with a fall of 10% or more. What is happening there? There can be only one answer: irrational exuberance. And as I have already pointed out: You cannot measure accurately, let alone predict, the fluctuations of investor sentiment.

But that doesn’t mean that speculating is a reasonable way to accumulate wealth.

(Note: Hedging and arbitrage are not necessarily speculating. If done properly, they are the opposite. We will talk about them another time. This is about speculating and only that.)

What is speculating? John Maynard Keynes said it is acting as if one “knows the future of the market better than the market itself.” I like that definition because it emphasizes the core problem with speculating. It is fundamentally a bet on the future. And betting on the future is betting on something that is largely unknowable. Why bet on future possibilities when you can make good money investing in the known facts, the realities, of the present?

Professional speculators use sophisticated strategies such as swing trading, pairs trading, and hedging along with fundamental analysis of companies/industries and macro analysis of economics/politics to place their bets.

Just think about what I just said. The best speculators are crunching numbers from all these realms and using complex, technical strategies to make their decisions. And it is all done in the hope of getting way-above-average ROIs. It’s a whole lot of work. And at the end of the day, success depends on thousands of uncontrollable and even unknowable details. Where is the reasonableness in that?

John Bogle, bestselling author and founder of the Vanguard Fund, wrote a book called The Clash of Cultures: Investment vs. Speculation. In it, he demonstrated that individual investors almost always lose big when they speculate. He says that speculating is an “unwise” strategy for ordinary people whose goal is to safely accumulate funds for retirement.

“The internet and financial media may encourage speculation,” he says. “But that doesn’t mean you should follow the herd.”

Indeed. The reason the financial media and the brokerage community promote speculation is because they benefit from the fact that most speculators lose and lose big. And all those losses end up in the pockets of the brokers and the bankers and also the prudent investors that would rather invest their money safely for reasonable gains than gamble for big wins.

* In this series of essays, I’m trying to make a book about wealth building that is based on the discoveries and observations I’ve made over the years: What wealth is, what it’s not, how it can be acquired, and how it is usually lost.

Continue Reading

Notes From My Journal

The Economy Is Looking Good: Don’t Get Giddy… or Scared

No Comments

Delray Beach, FL– There are lots of reasons why many people today are excited about the investment markets.

For the first time in 10 years, for example, the GDP growth rate is higher than the unemployment rate.

We are seeing the strongest expansion of manufacturing activity since May 2004, according to the WSJ.

Wages are rising. Not much in real terms, but more than we’ve seen since the last recession.

And according to several sources, consumer confidence has rarely been higher.

For some investors, Len Zachs (of Zachs Investment Research) argues in a recent report to his clients, this sort of economic environment creates a perilous paradox.

Some will see data like this as a signal to go all in – i.e., to put all of their spare change into the investment markets. Many, feeling emboldened by the “good” news, will take more risk, getting into speculative investments like low-cap stocks, mining stocks, hedge funds, start-ups, etc. And a smaller number will see it as scary. Fearing that we may be at the top of an investment cycle, they will sell their stocks and other holdings and retreat to cash.

None of these reactions is smart, says Zachs. “Investors should not see the current strength in the economy as a rationale for doubling down on risky ventures, and they should not see the market at all-time highs as a rationale for staying on the sidelines.”

“Instead of focusing on big returns in short periods of time, or trying to time your entries and exits into the market,” he says, “focus on the long-term and on key economic indicators that can help you stay level-headed.”

This has been my approach since I began to write about wealth building 20 years ago. After losing good money a few times by following my gut, I began to question the wisdom of trying to beat the market. I was pretty sure I couldn’t do it. Could anyone?

The answer was yes, but only for a given period of time. And since you can’t know when an analyst that’s been hot for years will suddenly go cold, I decided to step out of the “market timing” game.

The foundation of my current stock strategy is very safe and very long term. (And yet it’s done remarkably well over the short term as well.) I call it Legacy Investing.

 

 

Continue Reading

From My Work-in-Progress Basket

Principles of Wealth: #19 of 60*

No Comments

There are two ways that investments can build wealth. One is by the generation of income. The other is through appreciation – an increase in the value of the underlying asset.

Certain asset classes are inherently structured to increase value by generating income (e.g., bonds, CDs), while others increase value through appreciation (e.g., “growth stocks” and entrepreneurial businesses). But there are also many asset classes that provide both income and appreciation. The prudent wealth builder will likely have all three types of assets in his holdings, but he will favor those that provide both income and appreciation.

Continue Reading

Miscellaneous Essays

Wealth Building for Beginners (Even if You Are Not Young Anymore)*

No Comments

4.- “The Most Powerful Force in the Universe”

Legend has it that Albert Einstein was once asked what he considered the most powerful force in the universe. He answered, “Compound interest!”

It’s commonly thought that Einstein was joking when he made that famous pronouncement. I’d like to think he was serious. Compound interest is indeed one of the most powerful forces in the universe of making money. But it’s also one of the most profoundly powerful forces in every area of human enterprise.

Whether your goal is to create a new vaccine, build a faster computer, design a better building, or eliminate poverty, the time and effort you invest in your goals will compound over time, providing you with increasingly greater rewards.

When it comes to wealth building, the more time you have to invest, the easier it is to become wealthy. So starting when you’re young gives you a major advantage. However, the advice I’m going to give you here will work for you no matter how old you are or where you are right now in your wealth-building goals.

A simple example of the power of compound interest

If you took a penny and doubled it every day for a month, how much would you come up with? A hundred dollars? A thousand dollars? How about a million dollars?

Not even close. If you start with just a single penny and double it every day for 31 days, you’ll end up with… $21,474,836.48. More than twenty-one million dollars in a single month!

Your original penny will have turned into two. But then those two will have turned into four, those four turned into eight, and so on. The growth of your money will have accelerated, or sped up, not only because your original penny was collecting interest but also because all the pennies your received as interest also began to earn interest. And so the growth built up – or compounded.

That’s how we get the term compound interest.

There are three components to compound interest:

  1. How much you invest
  2. What return you get on your investment
  3. How much time you stay invested
Continue Reading

Miscellaneous Essays

Wealth Building for Beginners (Even if You Are Not Young Anymore)*

No Comments

 

3.-Your Invitation to the “$150,000 Club”

In the last installment https://www.markford.net/wealth-building-for-beginners-even-if-you-are-not-young-anymore-2 of this series, I told you how I got started on my own wealth-building journey. I hope it amused you. Looking back at it now, I can see that the ratio I kept between foolish and sound habits was about 2 to 1. But that was enough. I hope it comforts you to know that you can do most things wrong (as perhaps your parents and teachers always reminded you was your habit) and still become as wealthy as you need to be!

The second thing I did was to introduce you to a very simple and crazily powerful wealth secret that most high earners never follow: As your income increases (and it will!), you must resist the urge to ratchet up your spending accordingly.

And thirdly, I shared with you one of the most important insights about wealth that I ever learned. Luckily for me, I learned it when I was still relatively young. (In my early thirties.)

That insight was this: You need a lot less than you probably think to live a rich life: A lot less wealth. And also a lot less yearly income to acquire that wealth.

As for income… If you can get your income above $150,000 a year and simultaneously curb your enthusiasm for expensive toys, your chances of one day retiring wealthy are about 99.9 percent.

As for how much “money” you’ll need to sock away… A very rough number would be about 12 to 15 times the amount of money you’d need right now to lead a rich life.

If you can get your income up to $150,000 or beyond (and as I will show you that is quite easy to do if you are willing to put in the right sort of time) and if you can save 20 percent to 30 percent of that (which is very possible if you manage your finances as I’ll suggest), you will arrive one day at a net worth of between $3 million and $30 million.

And that – if you know how to spend your money – will be enough to provide a great, rich life for you and your family.

Before we move forward on that, you have to answer one question…

Continue Reading

Miscellaneous Essays

Wealth Building for Beginners (Even if You Are Not Young Anymore)*

No Comments

 2.- Welcome to My Path

 Let’s stop here, before we move through this thick wood, and think for a moment. What is it that you are looking for? Where do you want to go?

You say that you want to get rich. And as quickly as possible.

I say you are mistaken. But at this point, at the beginning of our journey, you can’t be expected to know that.

“If not getting rich, then what?” you want to know.

“You want to build wealth,” I say.

“What’s the difference?”

“There is a big difference,” I say. “It’s the difference between wanting and possessing, between anxiety and serenity, between having now and forever lacking.”

“Sounds like a lot of horseshit,” you reply.

“Follow me down this path and you’ll see,” I say with a wink and a smile.

“And why should I let you guide me?”

“It is my path. The one I cut. The one I know.”

Before I found my path

As a boy, I never had any goals or specific ambitions. I wanted only to be different from how I saw myself: weak, lonely, poor, and insignificant.

I dreamed – actually dreamed – of being rich and popular. I had a specific dream repeatedly for years. It took place in the parking lot “schoolyard” where we played during lunch break. All my classmates are there. A white limousine rides by slowly and stops. A chauffer jumps out, prances around the car, and opens the door. Little me, in white tails and brandishing a diamond-tipped walking stick, steps out. My classmates ooh and ah. I am loved.

I was earning money – or having a side hustle as they say now – ever since I could ride a bike.

I had the usual childhood jobs: delivering papers, cleaning neighbors’ kitchens, cutting grass, stocking groceries in the back of Al’s Deli, working in the Rockville Center Carwash, etc.

Before we graduated from high school, my friend Peter and I had a business painting the houses of the rich people that lived on Long Island’s north shore.

To pay for college and graduate school, I generally worked three jobs, including writing essays for my fellow students. (I offered them a guaranteed grade of B or better.)

Through it all, I never had a clear view of what I was doing. I had no money. I needed money. So I did whatever I could to make ends meet. Some weeks I made more money than I needed. When I did, I found a way to spend that money on something that pleased me for a few hours or, if I was smart, a few days.

I was walking but I wasn’t on a path.

I think I found my path in 1983.

The thing about having many goals…

Continue Reading